Tuesday, February 20, 2007

Serial entrepreneur Sunil Paul has this brilliant post in Venturebeat on why he’s veered into clean tech – for social values he upholds or for the profit that it might entail. Excerpts.

“We investors and entrepreneurs in the cleantech world have a guilty conscience. People often ask us, “Are you motivated by the money or by the mission?” It’s become unfashionable and a little shameful to say you’re driven by anything but profit, but I’m not afraid to say I’m a clean energy investor because of my values.

The money vs. mission question comes from fear. Environmentalists and energy security hawks fear capitalists will sell out their social goals in favor of profit. Investors fear a venture investor or entrepreneur will subvert their financial return for a social agenda.

Venture capitalists are beholden to their limited partners who are weighing whether to put money into venture capital versus, say, currency arbitrage. Those investors don’t want to hear that the venture capitalist has any motivation other than giving them a great return. That mentality rubs off on venture capitalists, and trickles down to entrepreneurs and management teams.

But it doesn’t have to be a choice between social and economic goals. Clean energy is like the love child of John Muir and Adam Smith. It joins environmentalism with capitalism. Cleantech companies have great value not captured by the price of the good or service. Their entire business model generates excess social return. In addition, the energy market is huge, and is ripe for change – and so the opportunity for profits is tremendous”.

This reminds me of a paper on leadership posted by Jason Drohn on Howard Schultz vision of Starbucks [ you may have to download a 4 page PDF file, but it’s good stuff – it has some exclusive finds ; like the lawyer who organized capital for Starbucks acquisition was Bill Gates’ Father !]. I think all these people are where they are today because of the level of genuine social commitment they carry.

Jason opines – “Schultz has a wonderful degree of integrity. As he was growing up, his father worked mid level jobs to pay the bills, without health coverage or worker’s compensation. So if he got laid off, his employment was simply terminated. If he got hurt on the job, he didn’t have anything to go back to.

In a 60 Minutes interview, Schultz commented on remembering what it was like to walk into his house, with his dad on the couch, cast on his leg. No job, nowhere to go to work, just a stack of bills and nothing to pay them with.

For this reason, Starbucks offers health insurance to anyone who works more than 20 hours a week, even in unmarried, spousal situations. They offer stock options to their employees throughout the whole company. And Schultz said that those benefits were something that would never be reconsidered.

This is the primary reason that coffee is as expensive as it is. Starbucks pays more in health care than they do the coffee beans to make the coffee !

So if you spend $4.10 on coffee, the majority of the cost goes to the health care being consumed by the person across the counter from you (the barista, in Schultzian terms..).

Adding to the integrity of Schultz and his company, he pays the coffee bean growers above market value for their crops. He feels that if he overpays a farmer, more passion and consistency will be given to their coffee beans. His social responsibility also plays a role in the decision as well.”

When you are asked, “are you in this to make money or change the world?” bring yourself to reply like Sunil bravely does. “Of course we wanted to change the world! Making money was just validation that it worked. Virtually every early internet entrepreneur I knew recognized the opportunity to change the world for the better by growing the Net. It wasn’t until many years later that the hordes of profit-only entrepreneurs came to the scene. Indeed, if you want a sign of over-investment in cleantech, look for an invasion of founders and CEOs who are in it only for the money.”

Would you not like to leave a green planet behind for your grandchildren ? This way, you will. You can convince your limited partners – for they too will have grandchildren !

Tuesday, February 13, 2007

For the uninitiated, Fortress Investment Group LLC, which manages $30 billion, became the first private-equity and hedge-fund manager to sell shares on U.S. markets and promptly emerged as one of the hottest initial public offerings in years. Its shares, issued at $18.50 apiece, opened for trading at $35 amid frenzied demand and closed at $31 -- 68% higher than its IPO price.

With its stock offering, Fortress is essentially inviting the public to share in the fees it earns managing private-equity and hedge-fund assets. At the end of 2005, the company's then-$7.6 billion in hedge fund assets (a hoard that has since grown) ranked it the 36th-largest fund globally.

What took me by surprise was Ehrenberg’s shock (“ Investors, are you stoned ?“ asks the Wall Street veteran) when the public market offered 40x valuation to Fortress’ shares.

I’ve commented my views to the blog post but then I couldn’t elaborate since I am a strict observer of blog ethics ( always be brief with comments ). But then I came across this wonderful piece in LA Times which squarely settles Ehrenberg’s misgivings.

To sum up, Fortress despite being a Hedge Fund manager went public because :-

a) a presence in Public Market gives it a perceived longevity, besides credibility ;

b) having a publicly traded stock allows its employees to turn their stakes in the company into income. In a partnership as Fortress had been, it was difficult to cash out. In a public company, it's a simple matter of selling shares. ;

c) it is a well timed move since hedge funds returned fantastic results in the year that had gone by ( 2006 ) and Fortress in particular enjoyed a great year itself ( earned $88 mm in the first half of 2006 ). Further, If Goldman was letting the public into its business after 130 years as a highly profitable — and secretive — private partnership, the insiders must have known that was as good as it would get.

d) Fortress is essentially inviting the public to share in the fees it earns managing private-equity and hedge-fund assets ; conversely if the following years turn out to be not as good as those gone by, it’s risk gets evenly distributed across a larger investor base.

e) Being publicly traded will increase the odds of gaining "permanence" as an investment manager. It will also attract high quality accredited investors and Board managed Pension and University funds which by their charter are barred from investing directly in lowly regulated vehicles like hedge funds which are not transparent.

f) The hedge fund and private-equity businesses are becoming ever more competitive as the number of players mushrooms. A serious shakeout is inevitable. When it happens, the firms with the deepest pockets will have the best chance of surviving.

And now this. Wal-Mart, the no. 1 retailer in the US, known as the 800-pound gorilla, unveiled a movie and TV download service yesterday and all the major studios have joined the party. Wal-Mart Stores said the download movie service offers more than 3,000 titles from Twentieth Century Fox, The Walt Disney Co., Lions Gate, Metro-Goldwyn-Mayer, MTV Networks, Paramount Pictures, Sony Pictures Entertainment, Universal Studios Home Entertainment, and Warner Bros. It also includes content from television networks Comedy Central, Fox, and Nickelodeon

The entry of foreign retailers has been a contentious issue for many years, with the government unable to convince the political establishment to support the move, given the stiff resistance from the powerful trader lobby who argues foreign players would wipe out the mom-and-pop stores ( called “Kirana stores” in local parlance). Under existing foreign investment norms, international players can own up to 51% stake in companies that sell only one brand through a chain of stores. The commerce & industry ministry is, however, planning to expand the scope of foreign participation to select sectors like electronics and sports goods, where global chains can open retail outlets.

But the truth is that with the emergence of the Indian retail formats like Big Bazaar, Subiksha and others have already begun to impact the fortunes of these kirana stores. Their customers have been deserting kirana stores en masse because of the better shopping experience and apparent discount offers at the neibhorhood mall. In fact, the real threat for Kirana stores are from retail supermarket format itself regardless of the nationality of its owners.

So it is in fact the Indian branded retail lobby which is running scared of the foreign retail chains.

The ruling Indian Congress party President Sonia Gandhi, had written to Prime Minister Dr.Manmohan Singh asking the government to take into account the implications that these transnational giants could have on neighbourhood kirana stores.

“For retail chains across the globe, the world is becoming a single market. We are looking at markets across the world from where one can source merchandise at the lowest price. We have opened our global sourcing offices in Hong Kong and China a few days back,” Future Group's CEO Kishore Biyani reportedly told a correspondent.

Now it’s the 800 pound gorilla’s turn to shake up the Indian Film industry and the budding online DVD rental outfits funded by Venture Capital firms in India. Huge PE investments ( $ 7.46 billion in 2006 across industries, bulk in infrastructure and real estate including multiplexes ) have been made in India anticipating blockbuster performances of these businesses.

The fun has just begun. With Indian VC investors quaking in their boots, it sure has all the trappings of an edge-of-the-seat thriller. Watch the space.

Thursday, February 01, 2007

Private Equity funds which feed on distressed debt - buying them at a steep discount, turn them around and sell off at a fabulous premium later are an asset class by themselves - known as “vulture funds” got a shot in the arm in Nov 2005, when Reserve Bank of India ( “RBI”) allowed Foreign Direct Investments up to 49% in the equity of Asset Reconstruction Companies (ARC). The RBI circular no.16 dated Nov.11, 2005 also allowed Foreign portfolio investments in security receipts issued by ARCs upto 49% of each tranche of such issue. There has been several legislations in this direction for quicker unlocking of value from stressed assets.

WITH the upturn in the economy raising the prospect of windfall gains from bad loans, banks are demanding a share of the upside from potential buyers of bad debt. This has come in response to the normal stance of private equity (PE) investors asking exiting debt-holders to exit the distressed company by taking a haircut of nearly 20% of the debt. In the recent past, some PE players such as Spinnaker had invested in IG Petrochemicals, Clearwater in Gayatri Waters and WL Ross in OCM.

India is becoming a hot destination for ‘scavenging’ despite all these pain points. Cash-rich private equity distress funds are hovering atop the $35-billion distressed asset market in the country sighting enormous wealth-creation opportunities. According to experts, 2006 has been an eventful year for distress funds as estimated investments in non-performing assets have grown from around $1 billion in 2005 to over $1.7 billion. It has been a safer bet for private equity (PE) players investing in distressed assets as many have fair potentials of recovery and are largely secured against tangible assets including high value real estate.